8-1
8
Reporting and Analyzing
Receivables
Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition
8-2
CHAPTER OUTLINE
LEARNING OBJECTIVES
8-3
1
Explain how companies recognize accounts receivable.
2
Describe how companies value accounts receivable and
record their disposition.
3
Explain how companies recognize, value, and dispose of
notes receivable.
4
Describe the statement presentation of receivables and the
principles of receivables management.
LEARNING
OBJECTIVE
1
Explain how companies recognize
accounts receivable.
Amounts due from individuals and companies that are
expected to be collected in cash.
Amounts customers
owe on account that
result from the sale of
goods and services.
Written promise
(formal instrument) for
amount to be
received. Also called
trade receivables.
Nontrade receivables
such as interest, loans
to officers, advances
to employees, and
income taxes
refundable.
Accounts
Receivable
Notes
Receivable
Other
Receivables
8-4
LO 1
TYPES OF RECEIVABLES
Amounts due from individuals and companies that are
expected to be collected in cash.
ILLUSTRATION 8-1
Receivables as a percentage of assets
8-5
LO 1
RECOGNIZING ACCOUNTS RECEIVABLE
Service organization records a receivable when it
performs service on account.
Merchandiser records accounts receivable at the point
of sale of merchandise on account.
Seller may offer a discount to encourage early
payment.
Buyer might return goods found to be unacceptable.
►
8-6
Sales returns reduce receivables.
LO 1
RECOGNIZING ACCOUNTS RECEIVABLE
Illustration: Assume that Jordache Co. on July 1, 2017, sells
merchandise on account to Polo Company for $1,000 terms
2/10, n/30. Prepare the journal entry to record this transaction
on the books of Jordache Co.
Jul. 1
Accounts Receivable
Sales Revenue
8-7
1,000
1,000
LO 1
RECOGNIZING ACCOUNTS RECEIVABLE
Illustration: On July 5, Polo returns merchandise worth $100 to
Jordache Co.
Jul. 5
Sales Returns and Allowances
100
Accounts Receivable
100
Illustration: On July 11, Jordache receives payment from
Polo Company for the balance due.
Jul. 11
Cash ($900 - $18)
Sales Discounts ($900 x .02)
Accounts Receivable
8-8
882
18
900
LO 1
RECOGNIZING ACCOUNTS RECEIVABLE
Illustration: Some retailers issue their own credit cards.
Assume that you use your JCPenney Company credit card to
purchase clothing with a sales price of $300.
Accounts Receivable
300
Sales Revenue
300
Assuming that you owe $300 at the end of the month, and
JCPenney charges 1.5% per month on the balance due
Accounts Receivable
Interest Revenue
8-9
4.50
4.50
LO 1
ANATOMY OF A FRAUD
Tasanee was the accounts receivable clerk for a large non-profit foundation that provided
performance and exhibition space for the performing and visual arts. Her responsibilities included
activities normally assigned to an accounts receivable clerk, such as recording revenues from
various sources that included donations, facility rental fees, ticket revenue, and bar receipts.
However, she was also responsible for handling all cash and checks from the time they were
received until the time she deposited them, as well as preparing the bank reconciliation. Tasanee
took advantage of her situation by falsifying bank deposits and bank reconciliations so that she
could steal cash from the bar receipts. Since nobody else logged the donations or matched the
donation receipts to pledges prior to Tasanee receiving them, she was able to offset the cash that
was stolen against donations that she received but didn’t record. Her crime was made easier by
the fact that her boss, the company’s controller, only did a very superficial review of the bank
reconciliation and thus didn’t notice that some numbers had been cut out from other documents
and taped onto the bank reconciliation.
Total take: $1.5 million
The Missing Control
Segregation of duties. The foundation should not have allowed an accounts receivable clerk,
whose job was to record receivables, to also handle cash, record cash, make deposits, and
especially prepare the bank reconciliation.
Independent internal verification. The controller was supposed to perform a thorough review
of the bank reconciliation. Because he did not, he was terminated from his position.
8-10
LO 1
DO IT!
1
Recognizing Accounts Receivable
On May 1, Wilton sold merchandise on account to Bates for $50,000
terms 3/15, net 45. On May 4, Bates returns merchandise with a sales
price of $2,000. On May 16, Wilton receives payment from Bates for the
balance due. Prepare journal entries to record the May transactions on
Wilton’s books. (Ignore cost of goods sold entries.)
May 1
4
16
8-11
Accounts Receivable—Bates
Sales Revenue
50,000
50,000
Sales Returns and Allowances
Accounts Receivable—Bates
2,000
Cash ($48,000 - $1,440)
Sales Discounts ($48,000 x .03)
Accounts Receivable—Bates
46,560
1,440
2,000
48,000
LO 1
LEARNING
OBJECTIVE
2
Describe how companies value accounts
receivable and record their disposition.
VALUING ACCOUNTS RECEIVABLE
Current asset.
Valuation (net realizable value).
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts not
being collected.
Seller records losses that result from extending credit
as Bad Debt Expense.
8-12
LO 2
VALUING ACCOUNTS RECEIVABLE
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
Allowance Method
Losses are estimated:
No matching.
Better matching.
Receivable not stated at
net realizable value.
Receivable stated at net
realizable value.
Not acceptable for financial
reporting.
Required by GAAP.
8-13
LO 2
ACCOUNTS RECEIVABLE
How are these accounts presented on the Balance Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
8-14
LO 2
ACCOUNTS RECEIVABLE
ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash
Accounts receivable
500
Less: Allowance for doubtful accounts
(25)
Inventory
Prepaid expense
Total current assets
8-15
330
475
812
40
1,657
LO 2
ACCOUNTS RECEIVABLE
ABC Corporation
Balance Sheet (partial)
Alternate
Presentation
Current Assets:
Cash
330
Accounts receivable, net of $25 allowance
475
Inventory
812
Prepaid expense
Total current assets
8-16
40
1,657
LO 2
ACCOUNTS RECEIVABLE
Journal entry for credit sale of $100.
Accounts Receivable
Sales
Accounts Receivable
100
100
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
8-17
LO 2
ACCOUNTS RECEIVABLE
Journal entry for credit sale of $100.
Accounts Receivable
Sales
Accounts Receivable
Beg.
500
Sale
100
End.
600
8-18
100
100
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 2
ACCOUNTS RECEIVABLE
Collected $333 on account.
Cash
333
Accounts Receivable
Accounts Receivable
Beg.
500
Sale
100
End.
600
8-19
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 2
ACCOUNTS RECEIVABLE
Collected $333 on account.
Cash
333
Accounts Receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
8-20
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 2
ACCOUNTS RECEIVABLE
Adjustment of $15 for estimated bad debts.
Bad Debt Expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
8-21
333
15
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 2
ACCOUNTS RECEIVABLE
Adjustment of $15 for estimated bad debts.
Bad Debt Expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
8-22
333
Coll.
15
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 2
ACCOUNTS RECEIVABLE
Write-off of uncollectible accounts for $10.
Allowance for Doubtful Accounts
Accounts Receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
8-23
333
Coll.
10
10
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 2
ACCOUNTS RECEIVABLE
Write-off of uncollectible accounts for $10.
Allowance for Doubtful Accounts
10
Accounts Receivable
Accounts Receivable
Beg.
500
Sale
100
End.
8-24
257
333
Coll.
10
W/O
10
Allowance for
Doubtful Accounts
W/O
25
Beg.
15
Est.
30
End.
10
LO 2
ACCOUNTS RECEIVABLE
ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash
330
Accounts receivable, net of $30 allowance
227
Merchandise inventory
812
Prepaid expense
Total current assets
8-25
40
1,409
LO 2
Direct Write-Off Method for Uncollectible
Accounts
Illustration: Assume that Warden Co. writes off M. E. Doran’s
$200 balance as uncollectible on December 12. Warden’s
entry is:
Bad Debt Expense
200
Accounts Receivable—M. E. Doran
200
Theoretically undesirable:
8-26
No matching.
Receivable not stated at cash realizable value.
Not acceptable for financial reporting.
LO 2
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable.
2. Debit Bad Debt Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. Companies debit Allowance for Doubtful Accounts and
credit Accounts Receivable at the time the specific
account is written off as uncollectible.
8-27
LO 2
Allowance Method for Uncollectibles
RECORDING ESTIMATED UNCOLLECTIBLES
Illustration: Hampson Furniture has credit sales of $1,200,000
in 2017, of which $200,000 remains uncollected at December
31. The credit manager estimates that $12,000 of these sales
will prove uncollectible.
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
8-28
12,000
12,000
LO 2
Allowance Method for Uncollectibles
Illustration 8-3
Presentation of allowance
for doubtful accounts
8-29
LO 2
Allowance Method for Uncollectibles
WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT
Illustration: The vice-president of finance of Hampson Furniture
on March 1, 2018, authorizes a write-off of the $500 balance
owed by R. A. Ware. The entry to record the write-off is:
Mar. 1
Allowance for Doubtful Accounts
Accounts Receivable—R. A. Ware
500
500
ILLUSTRATION 8-4
General ledger balances after write-off
8-30
LO 2
Allowance Method for Uncollectibles
RECOVERY OF AN UNCOLLECTIBLE ACCOUNT
Illustration: On July 1, R. A. Ware pays the $500 amount that
Hampson Furniture had written off on March 1. Hampson makes
these entries:
July 1
Accounts Receivable—R. A. Ware
500
Allowance for Doubtful Accounts
1
Cash
Accounts Receivable—R. A. Ware
500
500
500
▼ HELPFUL HINT
Like the write-off, a recovery does
not involve the income statement.
8-31
LO 2
Allowance Method for Uncollectibles
ESTIMATING THE ALLOWANCE
ILLUSTRATION 8-6
Nike’s allowance method disclosure
8-32
LO 2
ESTIMATING THE ALLOWANCE
Under the percentage-ofreceivables basis,
management establishes
a percentage relationship
between the amount of
receivables and expected
losses from uncollectible
accounts.
Amount of bad debt expense that should be recorded in the
adjusting entry is the difference between the required balance
and the existing balance in the allowance account.
8-33
LO 2
ESTIMATING THE ALLOWANCE
Aging of Accounts Receivable
8-34
Illustration 8-7
Aging schedule
▼ HELPFUL HINT
The percentage-ofreceivables basis
may use only a
single percentage
rate.
LO 2
ESTIMATING THE ALLOWANCE
Illustration: Assume the unadjusted trial balance shows
Allowance for Doubtful Accounts with a credit balance of $528.
Prepare the adjusting entry assuming $2,228 is the estimate of
uncollectible receivables from the aging schedule.
Dec. 31
Bad Debt Expense
Allowance for Doubtful Accounts
8-35
Illustration 8-8
Bad debts accounts after posting
1,700
1,700
LO 2
ACCOUNTS RECEIVABLE
Illustration 8-9
Sketchers USA’s note disclosure of accounts receivable
8-36
LO 2
ETHICS INSIGHT
Cookie Jar Allowances
There are many pressures on companies to achieve earnings targets. For
managers, poor earnings can lead to dismissal or lack of promotion. It is not
surprising then that management may be tempted to look for ways to boost
their earnings number. One way a company can achieve greater earnings is to
lower its estimate of what is needed in its Allowance for Doubtful Accounts
(sometimes referred to as “tapping the cookie jar”). For example, suppose a
company has an Allowance for Doubtful Accounts of $10 million and decides to
reduce this balance to $9 million. As a result of this change, Bad Debt Expense
decreases by $1 million and earnings increase by $1 million. Large banks such
as JP Morgan Chase, Wells Fargo, and Bank of America recently decreased
their Allowance for Doubtful Accounts by over $4 billion. These reductions
came at a time when these big banks were still suffering from lower mortgage
lending and trading activity, both of which lead to lower earnings. They justified
these reductions in the allowance balances by noting that credit quality and
economic conditions had improved. This may be so, but it sure is great to have
a cookie jar that might be tapped when a boost in earnings is needed.
8-37
LO 2
2a
DO IT!
Bad Debt Expense
Brule Co. has been in business five years. The unadjusted trial
balance at the end of the current year shows:
Accounts Receivable
Sales Revenue
Allowance for Doubtful Accounts
$30,000 Dr.
$180,000 Cr.
$2,000 Dr.
Bad debts are estimated to be 10% of receivables. Prepare the
entry to adjust Allowance for Doubtful Accounts.
SOLUTION
Bad Debt Expense
Allowance for Doubtful Accounts
5,000 *
5,000
* [(10% x $30,000) + $2,000]
8-38
LO 2
DISPOSING OF ACCOUNTS
RECEIVABLES
Sale of Receivables to a Factor
Finance company or bank.
Buys receivables from businesses and then collects
the payments directly from the customers.
Typically charges a commission to the company that
is selling the receivables.
Fee ranges from 1% to 3% of the receivables
purchased.
8-39
LO 2
Sale of Receivables to a Factor
Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon Furniture
is as follows.
($600,000 x 2% = $12,000)
Cash
Service Charge Expense
Accounts Receivable
8-40
588,000
12,000
600,000
LO 2
DISPOSING OF ACCOUNTS
RECEIVABLES
National Credit Card Sales
Retailer pays card issuer a fee of 2 to 4% of the invoice
price for its services.
8-41
Recorded the same as cash sales.
Advantages to retailer:
►
Issuer does credit investigation of customer.
►
Issuer maintains customer accounts.
►
Issuer undertakes collection and absorbs losses.
►
Receives cash more quickly.
LO 2
National Credit Card Sales
Illustration: Morgan Marie purchases $1,000 of compact discs
for her restaurant from Sondgeroth Music Co., and she charges
this amount on her Visa First Bank Card. The service fee that
First Bank charges Sondgeroth Music is 3%. Sondgeroth
Music’s entry to record this transaction on March 22, 2017, is
as follows.
Cash
Service Charge Expense
Sales Revenue
8-42
970
30
1,000
LO 2
ACCOUNTING ACROSS THE ORGANIZATION
How Does a Credit Card Work?
Suppose that you use a Visa card to purchase some new ties at Nordstrom.
The salesperson swipes your card, which allows the information on the
magnetic strip on the back of the card to be read. The salesperson then enters
in the amount of the purchase. The machine contacts the Visa computer,
which routes the call back to the bank that issued your Visa card. The issuing
bank verifies that the account exists, that the card is not stolen, and that you
have not exceeded your credit limit. At this point, the slip is printed, which you
sign. Visa acts as the clearing agent for the transaction. It transfers funds from
the issuing bank to Nordstrom’s bank account. Generally this transfer of funds,
from sale to the receipt of funds in the merchant’s account, takes two to three
days. In the meantime, Visa puts a pending charge on your account for the
amount of the tie purchase; that amount counts immediately against your
available credit limit. At the end of the billing period, Visa sends you an invoice
(your credit card bill) which shows the various charges you made, and the
amounts that Visa expended on your behalf, for the month. You then must
“pay the piper” for your stylish new ties.
8-43
LO 2
2b
DO IT!
Factoring
Peter M. Kell Wholesalers Co. needs to raise $120,000 in cash to
safely cover next Friday’s employee payroll. Kell has reached its
debt ceiling. Kell’s present balance of outstanding receivables totals
$750,000. Kell decides to factor $125,000 of its receivables on
September 7, 2017, to alleviate this cash crunch. Record the entry
that Kell would make when it raises the needed cash. (Assume a
1% service charge.)
SOLUTION
Cash
Service Charge Expense
Accounts Receivable
* (1% x $125,000)
8-44
123,750
1,250 *
125,000
LO 2
LEARNING
OBJECTIVE
3
Explain how companies recognize, value, and
dispose of notes receivable.
Companies may grant credit in exchange for a promissory
note. A promissory note is a written promise to pay a
specified amount of money on demand or at a definite time.
Promissory notes may be used
1. when individuals and companies lend or borrow money,
2. when amount of transaction and credit period exceed
normal limits, or
3. in settlement of accounts receivable.
8-45
LO 3
NOTES RECEIVABLE
To the payee, the promissory note is a note receivable.
To the maker, the promissory note is a note payable.
8-46
ILLUSTRATION 8-12
Promissory note
LO 3
DETERMINING THE MATURITY DATE
Maturity date of a promissory note may be stated in one
of three ways:
1. On demand.
2. On a stated date.
3. At the end of a stated period of time.
Note terms are expressed in:
8-47
Months
Days
LO 3
COMPUTING INTEREST
ILLUSTRATION 8-13
Formula for computing interest
When counting days, omit the date the note is issued, but
include the due date.
8-48
ILLUSTRATION 8-14
Computation of interest
LO 3
RECOGNIZING NOTES RECEIVABLE
Illustration: Brent Company wrote a $1,000, two-month, 8%
promissory note dated May 1, to settle an open account.
Prepare entry would Wilma Company makes for the receipt
of the note.
May 1
Notes Receivable
Accounts Receivable—Brent Company
8-49
1,000
1,000
LO 3
VALUING NOTES RECEIVABLE
Report short-term notes receivable at their cash
(net) realizable value.
Estimation of cash realizable value and recording
bad debt expense and related allowance are similar
to accounts receivable.
8-50
LO 3
INTERNATIONAL INSIGHT
Can Fair Value Be Unfair?
The FASB and the International Accounting Standards Board
(IASB) are considering proposals for how to account for financial
instruments. The FASB has proposed that loans and receivables
be accounted for at their fair value (the amount they could currently
be sold for), as are most investments. The FASB believes that this
would provide a more accurate view of a company’s financial
position. It might be especially useful as an early warning when a
bank is in trouble because of poor-quality loans. But, banks argue
that fair values are difficult to estimate accurately. They are also
concerned that volatile fair values could cause large swings in a
bank’s reported net income.
Source: David Reilly, “Banks Face a Mark-to-Market Challenge,” Wall
Street Journal Online (March 15, 2010).
8-51
LO 3
DISPOSING OF NOTES RECEIVABLE
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an adjustment
to the account.
3. Holder speeds up conversion to cash by selling the note
receivable.
8-52
LO 3
DISPOSING OF NOTES RECEIVABLE
Honor of Notes Receivable
A note is honored when its maker pays it in full at its
maturity date.
Dishonor of Notes Receivable
A dishonored note is not paid in full at maturity. Dishonored
note receivable is no longer negotiable.
8-53
LO 3
Honor of Notes Receivable
Illustration: Wolder Co. lends Higley Inc. $10,000 on June 1,
accepting a five-month, 9% interest note. If Wolder presents
the note to Higley Inc. on November 1, the maturity date,
Wolder’s entry to record the collection is:
Nov. 1
Cash
10,375
Notes Receivable
10,000
Interest Revenue
375
($10,000 x 9% x 5/12 = $375)
8-54
LO 3
Accrual of Interest Receivable
Illustration: Suppose instead that Wolder Co. prepares
financial statements as of September 30. The adjusting entry
by Wolder is for four months ending Sept. 30.
Illustration 8-15
Timeline of
interest earned
Sept. 1
Interest Receivable
Interest Revenue
300
300
($10,000 x 9% x 4/12 = $ 300)
8-55
LO 3
Accrual of Interest Receivable
Illustration: Prepare the entry Wolder’s would make to record
the honoring of the Higley note on November 1.
Nov. 1
Cash
10,375
Notes Receivable
Interest Receivable
Interest Revenue ($10,000 × 9% × 1/12)
8-56
10,000
300
75
LO 3
DO IT!
3
Notes Receivable
Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 6% note
dated May 10 in settlement of Leonard’s overdue open account.
The note matures on August 8. What entry does Gambit make at
the maturity date, assuming Leonard pays the note and interest in
full at that time?
SOLUTION
Interest payable at maturity date = $3,400 × 6% × 90/360 = $51
Cash
8-57
3,451
Notes Receivable
3,400
Interest Revenue
51
LO 3
LEARNING
OBJECTIVE
4
Describe the statement presentation of
receivables and the principles of receivables
management.
Illustration 8-16
Balance sheet presentation of receivables
8-58
LO 4
MANAGING RECEIVABLES
Managing accounts receivable involves five steps:
1. Determine to whom to extend credit.
2. Establish a payment period.
3. Monitor collections.
4. Evaluate the liquidity of receivables.
5. Accelerate cash receipts from receivables when
necessary.
8-59
LO 4
MANAGING RECEIVABLES
Extending Credit
If the credit policy is too tight, you will lose sales.
If the credit policy is too loose, you may sell to
customers who will pay either very late or not at all.
It is important to check references on potential new
customers as well as periodically to check the financial
health of continuing customers.
8-60
LO 4
ACCOUNTING ACROSS THE ORGANIZATION
Bad Information Can Lead to Bad Loans
Many factors contributed to the recent credit crisis. One significant factor that
resulted in many bad loans was a failure by lenders to investigate loan
customers sufficiently. For example, Countrywide Financial Corporation wrote
many loans under its “Fast and Easy” loan program. That program allowed
borrowers to provide little or no documentation for their income or their assets.
Other lenders had similar programs, which earned the nickname “liars’ loans.”
One study found that in these situations, 60% of applicants overstated their
incomes by more than 50% in order to qualify for a loan. Critics of the banking
industry say that because loan officers were compensated for loan volume,
and because banks were selling the loans to investors rather than holding
them, the lenders had little incentive to investigate the borrowers’
creditworthiness.
Sources: Glenn R. Simpson and James R. Hagerty, “Countrywide Loss Focuses
Attention on Underwriting,” Wall Street Journal (April 30, 2008), p. B1; and Michael
Corkery, “Fraud Seen as Driver in Wave of Foreclosures,” Wall Street Journal
(December 21,2007), p. A1.
8-61
LO 4
MANAGING RECEIVABLES
Establishing a Payment Period
Companies should determine a required payment
period and communicate that policy to their customers.
The payment period should be consistent with that of
competitors.
8-62
LO 4
MANAGING RECEIVABLES
Monitoring Collections
Companies should prepare an accounts receivable
aging schedule at least monthly.
►
Helps managers estimate the timing of future cash
inflows.
►
Provides information about the collection
experience of the company and identifies problem
accounts.
Significant concentrations of credit risk must be
discussed in the notes to its financial statements.
8-63
LO 4
MANAGING RECEIVABLES
Illustration 8-18
Excerpt from Sketchers’ note on concentration of credit risk
8-64
LO 4
EVALUATING LIQUIDITY OF RECEIVABLES
Accounts Receivable Turnover:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Average collection period:
Used to assess effectiveness of credit and collection
policies.
8-65
Collection period should not exceed credit term period.
LO 4
EVALUATING LIQUIDITY OF RECEIVABLES
ILLUSTRATION 8-19
Accounts receivable turnover
and average collection period
8-66
LO 4
ACCELERATING CASH RECEIPTS
Three reasons for the sale of receivables:
1. Size.
2. Companies may sell receivables because they may
be the only reasonable source of cash.
3. Billing and collection are often time-consuming and
costly.
8-67
LO 4
MANAGING RECEIVABLES
Illustration 8-20
Managing receivables
8-68
LO 4
DO IT!
4
Analysis of Receivables
In 2017, Lebron James Company had net credit sales of $923,795 for
the year. It had a beginning accounts receivable (net) balance of
$38,275 and an ending accounts receivable (net) balance of $35,988.
Compute Lebron James Company’s accounts receivable turnover and
average collection period in days.
SOLUTION
8-69
LO 4
A Look at IFRS
LEARNING
OBJECTIVE
5
Compare the accounting for receivables
under GAAP and IFRS.
KEY POINTS
Similarities
8-70
The recording of receivables, recognition of sales returns and
allowances and sales discounts, and the allowance method to
record bad debts are the same between GAAP and IFRS.
Both IFRS and GAAP often use the term impairment to indicate
that a receivable or a percentage of receivables may not be
collected.
LO 5
A Look at IFRS
Similarities
The FASB and IASB have worked to implement fair value
measurement (the amount they currently could be sold for) for
financial instruments, such as receivables. Both Boards have
faced bitter opposition from various factions.
Differences
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Although IFRS implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation.
LO 5
A Look at IFRS
Differences
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IFRS and GAAP differ in the criteria used to determine how to
record a factoring transaction. IFRS uses a combination
approach focused on risks and rewards and loss of control.
GAAP uses loss of control as the primary criterion. In addition,
IFRS permits partial derecognition of receivables; GAAP does
not.
LO 5
A Look at IFRS
LOOKING TO THE FUTURE
Both the IASB and the FASB have indicated that they believe that
financial statements would be more transparent and understandable if
companies recorded and reported all financial instruments at fair
value. That said, in IFRS 9, which was issued in 2009, the IASB
created a split model, where some financial instruments are recorded
at fair value, but other financial assets, such as loans and receivables,
can be accounted for at amortized cost if certain criteria are met.
Critics say that this can result in two companies with identical
securities accounting for those securities in different ways. A proposal
by the FASB would require that practically all equity instruments be
reported at fair value, and that debt instruments may or may not be
reported at fair value depending on whether certain criteria are met.
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LO 5
A Look at IFRS
IFRS Practice
Which of the following statements is false?
a) Receivables include equity securities purchased by the
company.
b) Receivables include credit card receivables.
c) Receivables include amounts owed by employees as a
result of company loans to employees.
d) Receivables include amounts resulting from transactions
with customers.
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LO 5
A Look at IFRS
IFRS Practice
In recording a factoring transaction:
a) IFRS focuses on loss of control.
b) GAAP focuses on loss of control and risks and rewards.
c) IFRS and GAAP allow partial derecognition.
d) IFRS allows partial derecognition.
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LO 5
A Look at IFRS
IFRS Practice
Under IFRS:
a) the entry to record estimated uncollected accounts is the
same as GAAP.
b) it is always acceptable to use the direct write-off method.
c) all financial instruments are recorded at fair value.
d) None of the above.
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LO 5
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